China's Economic Future Continues To Remain Ambiguous

December 04, 1998|By Jim Hoagland, Washington Post Writers Group.

WASHINGTON — The economic news coming out of China makes clear the unsettled, and unsettling, nature of reform in the world's most populous nation. China's fate is still up for grabs as its Communist rulers veer between free market practices and Leninist politics in their battle for survival.

The aged Politburo has confounded the predictions both of bloody revolution and of smooth transformation to capitalism that flourished at the beginning of the decade. But serious problems are now emerging that could undermine this regime's claim to legitimacy.

President Jiang Zemin and his aides have hoisted themselves on an increasingly dubious promise of delivering 8 percent growth again this year. To achieve that politically sacrosanct target, Jiang's government has ordered China's banks to provide more huge unsecured loans to unprofitable state-owned industries that are already deeply in debt.

China's leaders are trying to buy growth, by impounding the nation's household savings. They add another story onto the house of cards they promised to dismantle with free market reforms.

China's rapid growth in the 1990s has become the nation's talisman. Growth is cited by the government as justification for the massacres of pro-democracy demonstrators in 1989, for the repression that followed and for the small political openings Jiang has allowed more recently. But the retreats from capitalism show how deeply worried the Politburo is by widening unemployment and social unrest that followed factory closings in the spring.

"They are trying to save state-owned enterprises that have been bleeding red ink for a decade or more," says Brookings scholar Nicholas R. Lardy, "when they should be directing credit toward smaller, nonstate and productive enterprises."

Lardy's penetrating new book "China's Unfinished Economic Revolution" shows that bank deposits of citizens are being systematically raided by the government to support the failing state industries. Investment funds are being shifted out of fast-growing coastal regions and pumped into slow-growing areas still tied to collectivism.

Lardy dispassionately unmasks the shakiness of China's banking system. He suggests that China's respite from the Asian financial crisis is temporary, a prediction that strikes at the heart of President Clinton's entire China strategy. China's rate of growth is in any event overstated, and dependent on an extraordinarily high household savings rate, Lardy shows.

The author's credibility is enhanced by his apolitical approach to his subject. He gives China's financial managers credit for what they have done right. Lardy is a scholar unwilling to accept conventional wisdom, or sweep unpleasant trends under the rug.

A lack of alternatives and mild coercion seem to account for the willingness of Chinese workers to continue to put their earnings into banks that are legally insolvent and that are forced to lend money to industries that are also bankrupt. This is what Marxist economics has always become when combined with Leninist politics: theft by another name.

A domestic banking crisis could help undermine the country's fixed exchange rate policy, praised so lavishly this summer by Clinton and Secretary of Treasury Robert Rubin in advance of Clinton's ceremonial visit. The no-devaluation policy has in fact become a fig leaf for a pernicious export subsidy scheme that is helping boost the U.S. trade deficit with China. And Beijing has now shelved its efforts to join the World Trade Organization, a major objective of Clinton's China policy.

Do not hold your breath waiting for Washington to call attention to China's backtracking. It is politically inconvenient for Clinton's special friendship with Jiang. When facts collide with ideology and politics in Washington, it is usually facts that get smothered in the crib.

Remember the communist "reforms" that were to lead to "convergence" between a decadent West and a disciplined Soviet empire? In the months before it collapsed and disappeared into the history books, East Germany continued to be widely described as the world's 13th strongest economic power and a force for stability.

Only after the Soviet Union collapsed in economic ruins did the CIA and other analysts stop predicting major industrial growth and constantly expanding budgets for Moscow.

This gigantic analytical failure of the past decade should lead Western governments, corporations and citizens to resist unqualified enthusiasm for and confidence in the economic statistics kept by the Leninist government of China. Lying, and theft of personal property, are in the very nature of the totalitarian politics that Jiang and his associates still openly proclaim to be theirs.